Key Market – Argentina

Opportunity driven by critical need for more electricity generating capacity and constrained natural gas supplies during times of peak demand

Headlines on the outlook for LPG Power Generation in Argentina:

  • Sharply increasing electricity, natural gas and diesel prices, along with the government’s stated aim of moving away from its main power generation fuel (natural gas), puts LPG in a good position as a strong alternative in the short term.
  • The need to replace much of the existing capacity, could support LPG Power Generation deployment.

Below, we discuss the key factors that influence the outlook for LPG Power Generation in Argentina in more detail.

Energy prices – Natural gas, oil, and electricity prices are high and set to continue to rise, providing an opportunity for power generation from increasingly cost-effective LPG

For 12 years, industrial and residential customers in Argentina paid extremely low, distorted prices for their energy. Tariffs for electricity were significantly subsidised by the government. However, in 2015, the new government announced that it would aggressively cull its large subsidies for energy (both electricity and natural gas) and reduce them to zero by 2019 in order to help the government close its yawning fiscal deficit. This has caused sharp increases in the price of energy; electricity prices increased by up to 300% in 2016, and natural gas prices were up by almost 400% (illustrated in Figure 4). Prices for both are expected to continue to rise sharply. This presents a strong opportunity for LPG power generation, as natural gas makes up the majority of the generation mix (used in 60% of power generation – see Figure 5). This opportunity is compounded by the fact that the government aims to reduce its dependence on natural gas to produce electricity.

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Electricity & natural gas grid infrastructure – The need to replace existing power generation capacity, with the aim of moving away from natural gas all play in LPG’s favour.

Key characteristics of Argentina’s power sector are increasing demand for electric power (at a rate of ~6% annually), coupled with aging, inefficient electricity generating capacity (70% of the country’s conventional installations have been described as ‘obsolete’), and high operational costs. Natural gas is the dominant fuel for generation and demand for it is growing (consumption has increased by ~18% since 2005). However, not being available for large parts of the year due to the fact that it is diverted to homes during the winter months, along with its general availability declining (domestic oil and gas production has dropped by 12% and 20% respectively compared to 2005 levels), means that the country has to import large quantities to meet its generation needs, and has had to plan blackout events for certain areas.

The Argentinian government is seeking to increase its domestic natural gas production by further exploiting its 802 trillion cubic feet of shale gas resources (the second-largest shale gas reserves and fourth largest shale oil reserves globally), with the aim of halting LNG imports by 2022.

This refocus on domestic production of shale oil and gas should substantially increase the availability of propane on the domestic market, however according to experience in the USA and China for example, it may take 6-9 years for a shale area to reach the stage of full commercial development. In 2015, unconventional gas (including shale and ‘tight-sands’ gas) accounted for 15% of Argentina’s domestic gas production, and industry forecasts suggest that unconventional gas production will grow by 13% year-on-year to 2030 (with a total of 9,800 unconventional wells to be drilled in the period 2016 – 2030). However, with conventional gas production forecast to steadily decline over the same period (at around 4% annually), it is expected that Argentina will remain a net importer of gas through to 2030 at the earliest (unconventional gas production is expected to overtake conventional gas production in 2025). Therefore, to 2022, we expect gas shortages to remain an issue – but becoming less critical during the next five or so years, providing a short-term opportunity for LPG to make up for the shortfall.

 To meet rising power demand, it is estimated that domestic power generation will need to increase by 900 MWe/yr up to 2025, with the government’s aim for renewables to represent ~48% of this growth (10 GW). However, the government also aims to increase installed capacity of conventional technologies (investing ~$6bn), by adding 8 GWe of dispatchable energy by 2025 replace old LNG assets and add back-up power generation assets. Annual tenders for this capacity will amount to around 800 MWe. There should be room for LPG Power Generation to claim a portion of this opportunity.  During winter months, industrial facilities usually use diesel to meet their power needs, while diverting natural gas to residential consumers for space heating. LPG could provide a more economic, cleaner option here too.

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The Ministry of Energy aims to improve existing grid infrastructure and build new transmission lines in order to supply the population and ~150,000 industrial and commercial users with reliable power and eliminate significant transmission bottlenecks in the national grid.  To help with this, the government plans to increase the supply of electric power from neighbouring countries (for example a 1 GWe HV line from Bolivia).

Argentina possesses a comprehensive natural gas pipeline infrastructure (see Figure 6) and a highly developed and mature internal market. However domestic LNG supply (which reached 1.3 trillion cubic feet in 2015), is insufficient to meet the country’s needs.

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Policy & regulatory framework– LPG may be able to beat stiff competition to profit from new capacity tenders

Along with the other challenges outlined above, Argentina has previously suffered from a set of regulations that have complicated investments in power generation and distribution. Now, the government is seeking to remedy the situation by introducing more market-friendly policies. This has yielded cautious optimism among investors in the country’s energy projects. However, further clarity is needed within the regulatory framework to provide LPG investments with long-term confidence.

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Several global engine manufacturers are active in Argentina (illustrated below), many of which have projects in remote regions where pipeline access is currently difficult. Power shortages have resulted in a number of fast-tracked power plant orders, with companies like Wärtsilä benefiting from this. There is a big demand for duel fuel engines – Wärtsilä received 384 MWe of orders (consisting of five projects) for their duel fuel engines in 2016, three of which (totalling 192 MWe) will be installed in the central region of Santa Fe. As a result of the country’s new government’s openness to foreign capital, GE will invest $10bn over the next decade to develop power plants, while Siemens will help create investment and provide financing for $5.6bn in infrastructure projects, including gas-fired power plants.